After two hung-jury trials, a federal judge has dropped the criminal charges against a former Arthur Andersen accountant and an accounting manager who worked on Peregrine Systems’ financial statements while fraud was going on at the software company.

Daniel F. Stulac, one of the first outsideauditors in the post-Enron era to go to trial against allegations of direct collusion with corrupt management. The jury announced yesterday that it was deadlocked following the six-week trial, with six jurors voting not guilty on all charges. Mr. Stulac faced a maximum of 30 years in prison if convicted.

Mr. Stulac, formerly a partner of the former Big 5 accounting firm Arthur Andersen LLP, was charged in October 2004 by the U.S. Attorney’s Office in San Diego with securities fraud, wire fraud and bank fraud in connection with the financial reporting of Peregrine Systems, Inc. Peregrine was a San Diego-based software company that filed for bankruptcy in 2002 after it announced that it was conducting an internal investigation of possible misstatements in previous financial reports. The investigation resulted in the resignations of Peregrine’s CEO and CFO. At the time of the indictment against Mr. Stulac and ten other defendants, the U.S. Attorney described the case as “the largest fraud in the history of the Southern District of California.”

I am sorry that it’s come to this… Auditors, the last resort, if you’ll indulge me, using “I was duped” as a defense is unfortunate to say the least. Duped by “smarter” corporate executives such as in KPMG and Fannie Mae, “duped” by their own partners such as in the KPMG tax shelter case, “duped” by the Russians such as in PwC and Yukos….It’s pathetic.

Even Mr. Stulac’s 42 year old super brilliant attorney, Michael Attanasio, had to admit the double-edged sword of his defense while at the same time basking in his accomplishment:

Attanasio acknowledged that convincing the jurors of Stulac’s innocence wasn’t easy, even though the majority of both juries voted for his acquittal. “Several jurors had the impression that because my client was a CPA and because he worked for a large accounting firm at the time and he was well-educated, he should have known or must have known of the fraud given his role as an outside auditor,” Attanasio says. “It was tremendously difficult to dispel that notion in the jury selection and throughout the trial.”

Unfortunately for Mr. Stulac and the others that use this defense, their success comes with having folks realize that the auditors are not as smart as they look or should be. Maybe that’s the price of getting off the hook, but I’m sure it’s a bitter pill for Mr. Stulac to swallow.

It’s my understanding that, although this criminal trial is over, Mr. Stulac is still defending himself against civil charges and potential sanctions by the SEC.

Let’s hope for Mr. Stulac’s sake, Mr. Attanasio can pull some more rabbits out of his hat.

I don’t disagree with the comments that it’s a double-edged sword, but I think it’s more fair to say auditors do truly get duped by management at times and they won’t be able to immediately catch on. For example, if there are “side agreements” by the heads of companies that have no immediate impact to financial statements, you might not be able to catch it until much much later, if at all. Almost no auditor in the world will be able to catch such things.

When I was a senior auditor with Big 87654, we would get firm memos whenever the firm got sued for malpractice about how the firm was duped by an evil client. We seniors would discuss these memos. 90-95% of the time we concluded the firm’s official position was nonsense, that no partner at Big 87654 could have been so stupid as to have been fooled by whatever the “scam” was.

this defense is the best to any semi-complicated problem or one where some “expertise” is assumed to be needed and the best part is that accepting a little shame is usually enough proof for the accuser that you really were “duped”. i’ve used it successfully several times for electronic/internet issues and don’t believe it when i hear it from someone else for a second. even given that management holds an informational advantage over the auditors, they need to be skeptical enough to make sure they undertand what is going on

[…] the restatements, backdating scandals, and assorted frauds of their clients. It has been asserted at times with success. It’s being used more and more and more and more. But it smacks of the “have your cake and […]

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Francine McKenna (@retheauditors) is the Transparency Reporter at MarketWatch.com, a Dow Jones publication, where her work is also featured frequently in the Wall Street Journal. McKenna had more than twenty-five years of experience in consulting and professional services including tenure at two Big 4 firms, both in the US and abroad before becoming a journalist. Look for her prior columns, "Accounting Watchdog" at Forbes.com and "Accountable" at American Banker. For more information, click "About" at the bottom of this page. For more information contact Francine McKenna, fmckenna@mckennapartners.com